Government's Car of Tomorrow Relies on Yesterday's Failed Policies

The following article is based on a speech given by Michael LaFaive June 22, 2002, at Northwood University's annual "Freedom Seminar" in Midland.

It is a pleasure to be here this afternoon to talk to you about a government project that has garnered the questionable title, “Freedom Car.” I say questionable because it never ceases to amaze me how politicians can use words like “freedom” while introducing their latest foolish intervention.

There is nothing new about government’s inability to pick winners and losers in the marketplace, and that includes picking investments in types of automobiles, energy, or any other promising venture.

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Politicians can dress up mercantilism, economic central planning, or “industrial policy” however they like. They can give it lofty names and promise great consumer outcomes or hundreds of thousands of new “jobs,” if only we would accept their mandates about how we should live our economic lives.

At the end of the day, however, projects like the Freedom Car require the antithesis of human liberty to operate. What is the opposite of liberty? It is the application of force by a central authority. When government forces me to pay for economic programs that I would not fund voluntarily, I am less free.

I'm going to share with you some examples of government central planning’s failure to deliver the goods at the macro and micro level, and across countries, continents, industries, and time. When I say macro I mean on a large scale, such as a country, and micro refers to corporations and people. Not only does the majority of economic central planning not live up to its billing by supporters, it at best has a neutral effect on jobs and economic development. In many, probably most, instances, government involvement in commercially viable projects hurts economic growth and people.

I will also explain precisely why central planning is usually doomed to failure and why, despite the evidence of its failure, politicians insist on "investing" our tax dollars as if they were real entrepreneurs with the revolutionary vision of the Wright brothers, Henry Ford, or Steven Jobs. I will explain why market entrepreneurs have great advantages over their central planning rivals, and I will conclude my remarks by offering a very simple alternative to state-directed and subsidized investments in partnerships, public-private consortiums, or any other type of industrial policy scheme.

American governments have been sticking their noses into the business of business since George Washington's administration. I would like to share with you now a few of my favorite examples from history where government directly intervened in the economic affairs of its citizens. Because we’re talking about cars, energy, and new technology tonight, I will limit my examples to transportation, computers, and electric power.

Railroads and a canal in Michigan. In 1831 19-year old Stevens T. Mason was appointed Michigan's territorial governor. In 1837 Mason demanded state action for the building of railroads and canals because (like champions of the Freedom Car) he saw them as the wave of the future. Mason, however, deemed private ownership of these transportation mechanisms “extortion from the public” and persuaded the Legislature to invest $5 million in start-up revenue for one canal and two railroads. It was a disaster. After seven years, the state-run canal, which was supposed to stretch from Mt. Clemens to Kalamazoo—a distance of 160 miles—had only gone 16. It cost $350,000 and was shut down and written off with no more than $90.32 in total revenue for the effort. The two railroads Mason tried building suffered a similar fate. After nine years, neither railroad made it across the state, and one only half way. They were sold off to the private sector on the condition that they be rebuilt and extended across the state within three years.

Flight. How many people here know that the Wright brothers were forced to compete with a government-subsidized rival? The U.S. government gave $70,000 to scientist Samuel Langely to help him facilitate the development of a new technology—“a heavier than air flying machine.” (As with fuel cells, the state thought it should have a pecuniary interest in it.) The Langely plane flopped twice (into the Potomac River), and only nine days after the second failure, the unsubsidized Wright brothers flew at Kitty Hawk. Incidently, the Wright brothers only spent $2,000.

Supersonic Transport Planes. Staying with the theme of flight, perhaps all of you have heard of the Supersonic Transport Plane, or STP. The European version, known as the Concord, was designed and built under the guise of a public-private consortium of governments and businesses. The British and French governments thought it was necessary that their governments and businesses join forces to compete more effectively with American industry.

Estimates made by the British indicated that there was a world market for up to 500 STPs in 1970 and that, by selling only 30, the plane would pay for itself. What happened? It cost 15 times what it was estimated to build and a full 20 years to get flying from the time it was conceived. In addition, British and French taxpayers were forced to "invest" 650 million pounds (1970s), of which only one-third was recovered through sales. Today, only 13 of these planes fly worldwide and British Airways receives less than 2 percent of its annual revenue from Concord flights. The United States almost went down this same road, but our own STP consortium was mercifully de-funded in 1971.

Sematech. A U.S. “consortium” of just 14 private semiconductor businesses, called Sematech, was able to lobby the federal government for annual subsidies because it said it was a “critical industry.” The lobbying businesses were successful, and they excluded roughly 100 other semiconductor businesses operating in the U.S. from receiving the same favors. Sematech not only received subsidies, it was able to use its power to exclude competitors outside the consortium from having access to path-breaking technologies by cutting secret deals with firms on the grounds that they exclude non-consortium members. After $800 million and no measurable benefits from subsidizing the program, Congress pulled the plug.

Parternship for a New Generation of Vehicles. This is probably the most important of my examples. The PNGV program was a public-private partnership dedicated to constructing an affordable, zero-emission sedan that could get 80 mpg. After spending 8 years and $2.5 billion ($1.5 billion of it tax dollars), U.S. automakers have not delivered anything more than prototypes. So what is government’s response to the failure of its scientists and a consortium of business leaders to produce the results it promised? Now the Bush administration, led by Energy Secretary and Michigan resident Spencer Abraham, has decided to “refocus” this program in favor of the Freedom Car.

These are just five examples of government’s failure to invest scarce resources wisely. There are hundreds, perhaps thousands, of similar stories from around the globe. In addition, most academic studies have concluded that targeted business incentive programs have little impact on economic growth or successful research and development.

There are four important reasons why government-directed commercial ventures are usually counterproductive.

The knowledge problem. Economic development officials are not endowed with a unique or specialized understanding of how the economy works. They cannot reliably predict which businesses will succeed and which ones will fail, yet central planners consistently spend tax money under the belief that they’re doing society some sort of favor, that they know best how to improve our economic lives. This is the "fatal conceit" of central planning.

The term "fatal conceit" is from the title of a book by Nobel Laureate F.A. Hayek. In the book, Hayek describes the idea that the human intellect can somehow survey society, grasp it in all of its nuance and detail, and then improve it through some central force. Hayek knew this to be impossible, yet it is something that central planners ignore daily. Allow me to put central planning’s difficulties in perspective.

How many ways can you arrange three items? This is a simple factorial problem. The answer is six. Now, how many ways can you arrange 20 items? The answer is roughly all the seconds comprising 10 billion years. Let us extend this one step further. A deck of playing cards has 52 cards. It is very conceivable, even likely, that no shuffling of the deck anywhere in the world has ever or will ever produce an identically shuffled deck.

Yet central planners continue to operate under the illusion that they can somehow create exotic policy schemes and marshal the information that is necessary to organize our economy and commercial concerns in such a way that it would improve our lives more than if we were simply left alone to purchase automobiles or invest in the firms that make them voluntarily.

The Law of Beaker. Have you ever seen that skit on The Muppet Show where the terrorized lab assistant, Beaker, is always having experiments forced on him that end up being painful? Yet, his boss remains completely unaware of Beaker’s fear? That disconnect is similar to what happens when one person is in a position to take the resources of a second person and spend it on a third.

Nobel Laureate Milton Friedman accurately notes that there are only four ways to spend money. You can spend your money on yourself, your money on someone else, someone else’s money on yourself, or someone else’s money on someone else. Under what circumstance would you be the least careful? In addition, government expenditures often risk being used to curry favor with important constituents first, and to make wise expenditures second.

The cost/benefit equation. If a thief in Washington stole money and spent the loot buying cars from the Big Three, would we all just celebrate the increase in sales, or would we realize that there was a cost side to the profit equation? Someone had to lose in order for the Big Three to win. The same goes for government schemes such as the Freedom Car. Remember, government has nothing to give anyone except what it first takes from someone else. To make matters worse, the bureaucrats who devise and manage these exotic programs don’t work for free, which brings me to number four.

The “Sparrow Effect.” Have you ever heard of the expression “feeding the sparrows through the horses?” Imagine that a central planner wanted to help sparrows grow and prosper. The central planner can dump feed on the ground evenly and let sparrows partake of it directly, or he can run the feed through a horse first, and let the sparrows pick through the pile that the horse leaves behind. The bottom line is that it costs money to pay bureaucrats to take your money and redistribute it to someone else.

Individual entrepreneurs face the same knowledge constraint as government. No individual can divine the myriad ways in which society could organize itself. But their advantage lies in not having to.

First, Hayek pointed out that individuals have extremely specialized knowledge about themselves and improving their own world. As each of us works to maximize our own self-interest, we inadvertently improve others’ lives.

Second, a market left to operate without state interference has information transmitted to it through the price mechanism. As prices of goods rise they signal producers that there are profits to be made.

Third, when entrepreneurs believe they’ve made an error, its easier for them to pull back and redirect precious, scarce resources. Government has political decisions to make—such as pleasing a constituency—before they can pull back.

Lastly, government simply does not face the discipline imposed by free-market forces. When an entirely private venture fails to perform, it goes out of business; when government fails, it just takes more of your money.

So, what is the simple solution? End current programs and stop inventing new ones that redistribute money away from one group of people and businesses and toward another. Markets were creating new products and jobs long before governments even existed. There is no reason to think that people, left alone, won’t produce for themselves commercially desirable products such as a hydrogen-powered car, they’ll just do it on their own timetable instead of the government's.